Over 44% of Americans rely on financing to own their cars, which spells disaster if their payments are too high. It’s easy to get swamped with expensive car payments if you don’t know much about loans, or if you care a lot about your vehicle. The best way to avoid an unnecessarily high car payment is to arm yourself with knowledge about the loan process. Here are a few factors to keep in mind before you take on a car loan:
How Much Financing Do You Need?
A principal amount is the total amount of money you need to pay to purchase a car. The smaller this amount is, the less interest you’ll have to pay. You’ll also be able to make comfortable payments instead setting an unrealistic amount as your EMI. This is a simple step, but one that’s often overlooked by dealers and can go unnoticed by buyers. It is because most buyers have a trade-in they offer instead of a down payment.
You should also put down more money on top of what you get from your trade-in to reduce the size of the whole loan. More debt does not always equal better credit. Financially, it means that you’ll be paying a lot more on interest than if you gave a larger down payment in the beginning.
What Is the Best Interest Rate for You?
The interest rate you pay on your car loan depends on your credit score. For example, if your credit score is over 750 points, you could qualify for an interest rate of around 4%-6%, the best available. You can ask TransUnion, Experian, or Equifax for your credit score about once every year. This is called a soft inquiry, and does not affect your score at all.
If your score is low, your interest rate could be around 8%-19%, which is too much for most people to afford. Apart from shopping around for a better interest rate, you may want to find other alternatives to taking out a loan.
How Long Should You Pay the Loan?
The loan term is the time it takes to repay a loan. Interest is calculated every month, so if you increase your term, you will end up paying extra interest each month. The ideal loan term is three years or less, but if you need to set a more manageable monthly amount, you could opt for a four-year loan.
At the end of the day, it’s essential to stay on course and ensure that you don’t miss out on your car payments. Don’t forget any of your other monthly payments, either! Take these helpful hints and use them to the get the best out of your car loan.
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